Wall Street’s Not-So-Little Secret

Posted on Aug 28, 2011

In 2008, the 10 biggest U.S. banks and brokerage firms took $829 billion in emergency loans from the U.S. Treasury and the Federal Reserve. Who got what had been a secret, but thanks to months of litigation, an act of Congress and the work of numerous reporters, we now know.

Morgan Stanley, the largest borrower, received as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion. Even foreign companies borrowed large. Almost half of the Fed’s top 30 borrowers were European firms. The Edinburgh-based Royal Bank of Scotland took $84.5 billion—more than any other non-U.S. lender. Germany’s Hypo Real Estate Holding AG took $28.7 billion, which Bloomberg calculated as about $21 million for each of its 1,366 employees.

Some of the loans were very cheap. On Oct. 20, 2008, the U.S. central bank agreed to set a below-market interest rate of 1.1 percent on $113.3 billion worth of month-long loans. Banks were lending to each other at 3.8 percent that same day, which means they were profiting off emergency government relief in the middle of the financial crisis. —ARK

Bloomberg:

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

James: And the hilarious part is that these banks are deemed to be “good credits” ( as opposed to you and me) despite everyone knowing that their balance sheets are full of toxic loans that have not been marked-to-market.

Marked to what market? The market at which they were bought or the market value today? If marked-to-market today, yes they are bust because the loans are non-functional (that is, they are not interest bearing debt).

Which is what Quantitative Easing is all about. The Fed is buying Financial Assets throughout our Credit Institution System, to shore up balance sheets.This maneuver supposedly permits banks to loan more readily, which apparently is not yet the case.

Remember, the SubPrime Loans may be non-functional (nobody is paying the monthly installments), but the underlying realty values have not evaporated.

As those properties come back on the market and they become “functional”, they regain value and the Debt Instruments in which they are found of will also gain value. The Fed will then resell them into the market for interest-producing Debt Instruments – and probably make a profit doing so.

But, if you have read How the SubPrime Market was created, then you will know that not all mortgages in a given Debt Instruments were Toxic Waste. Many were Prime and Alt-A.

Investment Banksters seeded subprime debt with the better mortgages, the latter to enhance the attractiveness of the Structured Investment Vehicle (a Debt Instrument) that was “securitized” (sold forward to Debt Investors).

MY POINT

Make any devious accusation you want regarding banks, but, in this particular circumstance, history will prove that, in this dilemma, what was done by the US government is was what needed to be done. How do I know that?

Because the Japanese did the same with their real estate bust. And so did Sweden. And neither had much SubPrime Mortgage debt - because neither country had relaxed controls on mortgage creditworthiness as Uncle Sam did. Their market bubbles burst under sheer weight and lack of Demand for properties.

We are not the first to have known a calamitous real estate bubble - and we wont be the last.

WE, THE PEOPLE

People stupidly believe that when prices are rising astronomically that they will do so forever. But prices are like gravity - what goes up must come down. All price bubble have behaved in this manner, all price bubbles will behave in this manner.

And we get to bitch-in-a-blog when the sky falls upon our heads.

POST SCRIPTUM

The banksters are guilty as charged of greedy behavior – there is little doubt about that fact. But all too often, since we are soooo upset, we extend that guilt to the Fed and also Government policy makers in a frantic attempt to point the finger of blame.

Try being one of those policy makers. See how easy it is to second-guess markets over which you have too little control. Because the Replicants don’t want you to “smother Free Enterprise”.

We are not out of the woods. Replicants, for as long as we continue to vote them into Congress, will want to keep Free Enterprise “free” so it can make BigBucks - and the destinies of the ordinary people be damned.

We need far more market oversight control, because Bigness is not necessarily Always Better. In fact, if we have learned anything, it is often just the opposite.

Banks were lending to each other at 3.8 percent that same day, which means they were profiting off emergency government relief in the middle of the financial crisis.

Nonsense. The bank over-night rate is employed to close a bank’s books, which must be done nightly (and the end of the work day).

The banks are all lending to one another, so no one is actually “profiting” from the interest rate since the practice is continuous.

The above comment does not take into account the gravity of the situation. America is a credit-driven economy. Americans learned long ago what the rest of the world has finally assimilated - that credit leverages ones Disposible Income in order to purchase presently and not in the future by paying savings.

(Which is why America went from a Positive Savings Economy to a Negative Savings Economy.)

Had the system failed, that is, had banks stopped lending to one another, all such credit-making activity would have stopped dead. The economy would have tanked. There was a real threat that the entire system would indeed fail - given that banks were not lending to one another overnight since they had no faith that other banks would not fail.

That Vicious Circle had to be broken, which is why TARP was conceived and executed. It was a necessity or we would have had unemployment rates at 18% and 9% as finally happened.

In 2008 when the $800 billion bailout debate was being played out in Congress with the right hand, the Fed was doling out $1.2 trillion with the left hand. This is still not acknowledged. This is in addition to the $16 trillion that the ex-pat reported.

And the hilarious part is that these banks are deemed to be “good credits” ( as opposed to you and me) despite everyone knowing that their balance sheets are full of toxic loans that have not been marked-to-market. It’s all a free hand-out. These people crow about free enterprise, but the last thing any of them could stand is the slightest competition.

In terms of what we can do, first, everyone needs to realize their personal credit scores have absolutely no legal meaning or weight. Forget about them!

Second, move your money to a credit union! Do it today! That is the most important thing any of us can do to start to change things and reclaim our power.

Why didn’t the Federal Government do the same thing they did during the junk
bond scandals of the mid-80’s? The Regulators would have come in and done the
same thing the FED did - make good on the bank’s debts. The only difference
would have been that the management of the big Wall St. banks would have been
gone and the Regulators would have begun running the banks properly. The
reason that did not happen is because the Wall St. banks OWN the Federal
Government. When the law says one thing and Wall St. says something else - we
get something else. We don’t get justice. We, the everyday American taxpayer,
can’t afford justice. It’s been a complete betrayal of every American ideal that we
were taught in school. They have reduced the American Ideals to propaganda and
sold us out. Now they want to blame us for the problems and cut out the social
safety net programs that have helped save millions of Americans.

“Banks and financial companies all over the world get to borrow billions at 1%
interest, money they charge 30% interest to credit card holders.
“Why in hell does the Federal Reserve seem to be able to find the way to help
these entities that are gigantic?” U.S. Representative Walter B. Jones, a
Republican from North Carolina, said at a June 1 congressional hearing in
Washington on Fed lending disclosure. “They get help when the average
businessperson down in eastern North Carolina, and probably across America,
they can’t even go to a bank they’ve been banking with for 15 or 20 years and
get a loan.”

And what do American citizens get—laid off, no raises, foreclosures, and
unemployment benefits.